June 1 (Bloomberg) -- Banks have all but stopped lending to
each other, driving transactions in the interbank market to the
lowest level since August 1994 and undermining the validity of
the suite of interest rates known as Libor.

The CHART OF THE DAY shows loans between U.S. commercial
banks have slumped to $153 billion from a peak of $494 billion
in September 2008, the month that Lehman Brothers Holdings Inc.
filed for bankruptcy protection. The London interbank offered
rate is used to set interest charges on $360 trillion of
financial products worldwide, according to the Bank for
International Settlements.

“The interbank market died with Lehman Brothers,” said
David Keeble, head of fixed-income strategy at Credit Agricole
Corporate and Investment Bank in London. “Libor is a strange
beast, because the market that it’s based upon barely exists.
It’s going to take a couple more years to recover, and even then
will never regain its former glory.”

Loans between banks have evaporated after central banks
around the world pumped cash into the banking system by lending
money in exchange for debt securities following at least $1.8
trillion of writedowns and losses by financial institutions as
of May 18. U.S. commercial banks turned to the Federal Reserve
for short-term borrowing after Lehman’s bankruptcy led to a
collapse in trust amongst financial institutions, and the Fed
opened its discount window to banks.

“There’s a lot more certificates of deposit that get
issued instead of interbank lending, because they’re eligible if
you want to turn them into cash more quickly,” said Keeble.
“The whole structure has changed.”